Mitigation Discounts Pose Growing Problem in Florida Insurance

Published December 1, 2009

Insurance companies and consumer groups agree one of the best ways to prevent storm damage and limit claims is to harden homes adequately before an event occurs. Mitigation is the first and most important line of defense when it comes to disaster preparedness, they say.

To this end, many insurance companies offer mitigation discounts to their policyholders, reducing insurance premiums for homeowners who add measures such as roof tie-downs and storm shutters.

But there is disagreement on specific rules and guidelines in several states, including Florida, where mitigation discounts have become a hot-button issue.

In a paper on property mitigation, Eli Lehrer, director of the Center for Risk, Regulation, and Markets at the Competitive Enterprise Institute, argues codifying mitigation discounts can create problems.

“The value of any particular mitigation strategy depends on property location and verifiability. As a result, it is inadvisable to try and set mitigation discounts by statute,” Lehrer writes.

Commissioner Refuses Relief

Exemplifying the concerns over the issue, in August 2009 State Farm asked the Florida Office of Insurance Regulation to reduce the government-mandated mitigation discount. The company argued the discounts had become so popular they were beginning to hurt the insurance companies’ financial outlook. Florida Insurance Commissioner Kevin McCarty denied the request.

Supporters of the current system argue State Farm previously spoke in favor of these discounts and is now backtracking. In an interview with the Miami Herald, state Sen. Mike Fasano (R-New Port Richey) criticized State Farm for backing off a promise to policyholders.

Lawmakers Seek Better Numbers

Other legislators agree with the insurance industry on the need for a more precise approach to ensure the discounts are appropriate. State Rep. Bryan Nelson (R-Apoka) told the Miami Herald, “We want to be sure that the discounts we’re offering are right.”

Christian R. Camara, director of the Competitive Enterprise Institute’s Florida Insurance Project, argues one of the key flaws of the mitigation discount system is its “one-size-fits-all” approach.

“By specifying minimum discounts with almost no regard to property location and other factors, the State of Florida has made it impossible for insurers to take these very real differences into account, which often amounts to government forcing companies to charge less than they should be charging,” said Camara.

“This puts insurers’ finances, and by extension their policyholders, in jeopardy,” Camara added. “An insurer allowed to set its prices in response to market forces will almost always include mitigation discounts—well-mitigated properties are less risky and thus cheaper to insure than poorly built ones, and companies that don’t take that into account will give up business to competitors that do.”

Inconsistent Inspections

In a letter to the Windstorm Mitigation Committee of the Florida Commission on Hurricane Loss Projection Methodology, Liz Reynolds, Southeast state affairs manager for the National Association of Mutual Insurance Companies, pointed to other flaws in Florida’s mitigation system, including fraud and the inconsistency of inspections from one home to another.

“The purpose of mitigation discounts is to incentivize the hardening of homes. This effort cannot achieve full benefit when many people are receiving credits though they’ve done nothing to mitigate their homes,” Reynolds wrote.

“The resulting tragedy is that many homeowners are led to believe their homes are safer than they really are. It also means that those Floridians who have truly hardened their homes do not receive the full benefit for their efforts,” Reynolds added.

Matthew Glans ([email protected]) is a legislative specialist in insurance and finance at The Heartland Institute.

For more information …

“Principles for Property Mitigations Discounts,” by Eli Lehrer: